The Crowd Punter talks about Crowd Funding

I haven’t posted for a while, too busy entertaining the kids over the holidays and I’ve been spending my evenings trying to build myself a wood store before winter sets in, as usual I under-estimated how long it would take.

I have however been keeping half an eye on the ECF platforms and since I last posted I’ve made a few small amounts on Plum,Revolut and Edge10.

I’ve also been spending quite a lot of time trying out the many financial applications, bots and services that have pitched recently as well as their competitors, I’ve got some reviews in the pipeline but suffice to say, I liked Plum and Revolut enough to make investments. Revolut’s well polished banking platform is especially impressive.

In other news, Maily looks to have fallen on its ass and has run out of money – it’s still listed as active at the moment but I can’t see it lasting much longer. Enclothed have posted their accounts for the year ended 31st October 2016, their profit & loss account now shows they’re over £1.2m in the hole, from £500k the year before – I do like their offering, but they need to turn things around.

Finally, Crowdcube are now offering £2,000 (for the month of September) to anyone who recommends a company who successfully funds on the platform. As of writing they have just 10 active pitches (versus 18 on Seedrs), it may well be a quiet time of year but this sort of offer doesn’t send a great message to me at least. I haven’t punted on a CrowdCube pitch for quite some time, I admit I don’t look at it as regularly as Seedrs, but I have no cause to – They offer practically zero in the way of follow up, at least with Seedrs I’m regularly checking the discussion and update boards and it takes seconds to scan through any new pitches – Crowdcube really have made a rod for their own back.

The Seedrs secondary market opened for the third time today and with it a listing for Blue Crow Media. I have nothing particularly interesting to say about Blue Crow as a company, only that it publishes maps and turned a modest profit for the y/e 31st July 2016. No, what makes the Blue Crow lot interesting is Seedrs’ valuation.

Blue Crow completed their one and only raise on 29th May 2014 or 3 years, 2 months and 3 days ago. With this, as the opaque Seedrs ‘fair’ valuation model goes, because they haven’t raised for more than three years they are subject to “substantive valuation analysis”. I’m not too sure how substantive this analysis is, the lots available are offered at the same price as at the last raise.

If we then compare Blue Crow’s current ‘fair’ value with that of Bird Cycleworks which currently stands at zero (yes I’m moaning about that again) then it calls into question what exactly Seedrs are doing to keep their valuations fair and current? Both companies made a small profit last year (£17k for Bird and £6k for Blue Crow), they have similarly sized balance sheets with positive net current assets (£35k for Bird and £7k for Blue Crow) and have both filed accounts recently. The pre-money valuations at raise weren’t even that different with £450k for Bird and £950k for Blue Crow with Bird giving 10% away for £45k and Blue Crow £58k for 5%. With that information alone, in my opinion, Bird is arguably worth more than Blue Crow.

I think it’s about time Seedrs start publicising their valuation strategy for companies that fall into the ‘3 years since raise’ category. In theory, the number of companies falling into this category is going to increase, are Seedrs just going to leave the values alone so that lots can continue to be listed on the secondary market? If so, what’s to happen to companies who were valued before the launch? I’ve been asking Seedrs to clarify via email and Twitter to no avail, I will keep pressing.

We actually got some real news from Houseology today, initially I noticed a response from Stuart McGhie on the discussion board apologising for the delay in providing an update and also stating that they have “raised a further £400k from existing investors” apparently to allow them to go from a loss making company with lots of stock to a profit making company, I presume with less stock? Further to this, the post states that we investors should have received an email from the chairman detailing progress, I didn’t get an email from the chairman – but I did get an email from Kirsty Grant (of Seedrs) announcing a new round in Houseology for existing investors.

The (£400k) round is now live and there are a few things worth noting.

Perhaps most interestingly, it’s a down round i.e. the supposed value of the company has been reduced, in this instance from just over £9.5m to just over £5.15m – a significant drop! I’m not sure if this is a first for Seedrs, if not it’s certainly a rare occurrence. For a company that provides zero updates for 9 months and has a juicy loss of over £5.6m sitting on their balance sheet at the end of June 2016 having lost over £2.1m over the course of the preceding year, I’m not sure the new valuation is overly enticing. Other investors seem to agree as they’ve managed to raise just £156 between lunchtime and this evening.

The next thing to mention is that the pitch is almost completely void of any detail, we have literally one paragraph about the company, a brief mention of the decreased valuation and a mention of the attached letter (which I haven’t read yet) – the pitch ends with the (I’m sure unintentionally) ironic words “limited information is being provided at this time.”

One final thing to mention is that the post on the discussion board seems to contradict the pitch. To quote Stuart McGhie “We have raised a further £400k from existing investors”, so if they have raised £400k why are they asking us? I can only assume that these funds will materialise if when the pitch fails, perhaps the chairman’s letter sheds some light on this, I certainly hope so.

Update: Since writing this article I’ve had an update from Stuart McGhie that clears up a few things:

They’ve already raised £400k cash and it is in their account.

There is a total of £400k of shares available to shareholders.

The down round reflects the losses incurred.

I’ve been keeping track of the pitch since its launch – so far just over £650 has been committed from 11 investors and the discussion board has just one lonely (unanswered) post.

Another seven days have passed and still no news from Houseology, last week Stuart McGhie suggested an update might be posted in the next seven days… Well, those seven days are up and we have nothing.

They’re still happily posting interior design related tweets on Twitter and it also looks like their website has had a bit of an update, I think the ‘Trade’ section is new and the category section doesn’t look quite finished.

Things are clearly happening, recent (mixed) reviews suggest items are still being shipped – It’d be nice if we could just be told exactly how things are going.

I’ve been thinking about buying and properly reviewing some of the physical products I’ve invested in or seen pitched for a while. A couple of days ago I finally got around to it – I bought some Sugru moldable glue – £7.99 from Rymans! I haven’t yet worked out what I’m going to use it on.When I do I’ll let you know. I should also mention that I didn’t invest in Sugru when they pitched recently, although I did talk about them extensively.

On the walk back from Rymans, I decided to pop into Whole Foods Market in Picadilly in the knowledge (as an investor) that they stock Oppo (Healthy) Ice Cream, that, and I wanted some lunch. After finding the freezer cabinets and their wide selection of ice cream I found Oppo tucked towards the bottom. All four flavours were available in variously styled 500ml tubs priced at £5.99, sadly nothing in 100ml (I’m yet to find the mythical 100ml tub anywhere!). Oppo was jointly the most expensive ice cream on offer and as you’d expect from Whole Foods, everything else in the freezer looked to be from relatively independent producers with some products filling various ‘free from’ niches – nothing here was your mainstream Walls or Rossi.

Given it was raining and despite the fact that a whole 500ml tub would have been under 400 calories I still didn’t feel I could get through all that ice cream – If I can’t find any 100ml tubs close by, the next time I walk that way I might have a crack at the whole 500ml.

As a crowdfunded company Oppo are great at providing updates and interacting with us investors. It would be nice if their product was stocked a bit more widely, especially the 100ml tubs. I’m not sure who’s buying 500ml tubs of ice cream smack bang in the middle of the tourist-heavy west-end of London, but I would have thought the smaller 100ml tubs would fare much, especially if they come with a spoon. I will endeavour to try some sooner or later, in the meantime, I thought I’d straighten up their tubs for them.

PSD2 (EU) and the Open Banking Standard (UK) are regulations that will require banks and other payment servicing providers to provide APIs that allow third-party solutions to access their customers’ data (with consent). The exact timeline for the enforcement of the regulations is unclear, however, they should be in place by the end of 2018

In short, this means a company will be able to develop an application that combines a user’s financial data from a range of sources (e.g. current account, savings account, loans, credit cards etc.) in order to provide a consolidated view. Applications will be able to take this data a stage further and perform analysis in order to provide insights and suggestions about how to manage their money – That’s the theory anyway.

The reason I mention all this is because I’ve seen a spate of pitches recently that will be heavily dependent on these regulations as their solutions roll out. Right now there are live pitches for Plum Fintech and zuper on Seedrs as well as Folio on CrowdCube. We’ve also had a failed pitch from Ernest. Whilst obviously not identical, they are all very similar, they aim to access your account information in order to help you manage your money better, of course, the buzzword of the moment ‘A.I.’ is mentioned in every pitch but how to differentiate and pick the winner, if there’s to be one?

As I’ve already said, Ernest is out – they’ve already failed to raise. Folio and zuper are struggling, they’re both over the halfway mark but traction appears to be slow with tumbleweed currently rolling across both discussion boards. Plum Fintech on the other hand, is seeing a lot of attention, three pages of discussions and over the 100% mark. Does their product justify the marked difference in the success of their pitch? When I read it when it initially went live I didn’t see anything that particularly stood out, it’s savings focussed and their revenue is expected to come from savings interest (split with savers), fees on investment returns and commission earned from getting customers to switch things like their electricity or gas suppliers. I should also mention that the pitch is a convertible with a 20% discount on valuation at a trigger event (another raise, change of control etc.) or after 12 months (at which time a £4.25m valuation will apply).

Plum Fintech on the other hand, is seeing a lot of attention, three pages of discussions and over the 100% mark. Does their product justify the marked difference in the success of their pitch? When I read it when it initially went live I didn’t see anything that particularly stood out, it’s savings focussed and their revenue is expected to come from savings interest (split with savers), fees on investment returns and commission earned from getting customers to switch things like their electricity or gas suppliers. I should also mention that the pitch is a convertible with a 20% discount on valuation at a trigger event (another raise, change of control etc.) or after 12 months (at which time a £4.25m valuation will apply). Finally, I’ll also mention that Plum features heavily in Seedrs’ current advertising campaign on the London Underground. If I recall, WeSwap and VPAR have also recently featured in Seedrs’ LU advertising and they ended up over funding with 2,961 and 346 investors respectively.

I should also mention that the pitch is a convertible with a 20% discount on the ‘valuation’ at a trigger event (another raise, change of control etc.) or after 12 months (at which time a £4.25m valuation will apply).

Finally, I’ll also mention that Plum features heavily in Seedrs’ current advertising campaign on the London Underground. If I recall, WeSwap and VPAR have also recently featured in Seedrs’ LU advertising and they ended up over funding with 2,961 and 346 investors respectively.

The fact that this is a convertible is enough to put me off, I’m still bitter over the Den convertible. Also, despite the regulations, there’s nothing to say that the APIs offered by banks and payment providers have to follow a specific standard – Whilst they will undoubtedly make things easier for third parties things are unlikely to be simple. At least we’ll get to see what’s going on in 12 months time when they come back for more money.

After an email and a few Tweets, I’ve managed to coax Houseology out from their prolonged radio silence! In the words of Stuart McGhie (Finance Director according to LinkedIn):

“We have had a brief update ready to go for a few weeks now but just not managed to push out as the timing hasn’t been quite right. I can only ask that you remain patient for just a little while longer and something should be posted in the next 7 days.”

Company A is offering 10% equity in its business for £10,000, each share costs £20 so there are 500 shares up for grabs.

Company B is also offering 10% equity for £10,000, each share costs £50 so there are 200 shares up for grabs.

Which company is worth more?

In my world, they’re worth the same, but in the parallel universe that form the CrowdCube discussion boards, it seems some ‘investors’ think share price alone has a bearing on the overall ‘value’ of the company. You’d think someone from CrowdCube would step in and kindly offer an explanation, of course, they don’t so every company has to explain the same thing only for it to fall on what I can assume to be deaf ears.

As an ECF investor, I know the risks and like to think I have a reasonable grasp on how shares work, I think we’re supposed to attest to as much when we sign up. With investors frequenting the platform who think the share price means anything in isolation you have to start questioning the due diligence process, and I’m not just talking about CrowdCube here, the Seedrs discussions are just as bad.

As platform providers, do Seedrs and CrowdCube have the power to prevent people from investing if they think they are doing so irresponsibly and without understanding what they are doing? As FCA regulated entities, I would assume that they hold this power – I wonder if they’ve ever used it?

Having reviewed this CH post again and the post from yesterday, I’m now not entirely sure what’s going on. The 800k mentioned in this post just looks to pertain to the nominal value of the shares held by Dana. Something clearly happened at the beginning of the year, I’m just not sure what.

Enclothed, the men’s personal styling service had a crack at raising £350k on Seedrs back in Q1, the pitch fell flat and didn’t hit its target. Despite being a holder in Enclothed after their initial pitch on Crowdcube from 2015, I had issues with their valuation this time around that stopped me putting my hand in my pocket.

If I’m reading their CH filings correctly, it looks like one of the directors (Dana Zingher) has made a significant loan (just shy of £800k) to the business. I’m not sure what to make of this, it’s quite a sum and I’m obviously curious to know where it’s come from. Dana clearly hasn’t let the failed pitch put her off and is pressing ahead regardless.

I’ve used their service and that of one of their competitors and in my opinion, they came out on top in terms of customer service, particularly around arranging collection and the interaction with their stylist who seemed much less pushy than that of their competitor. The variety of brands/labels they supply may turn out to be a limiting factor – I think they need to broaden the brand list as it seemed from the couple of boxes I’ve had that they have a couple of brands they push harder than the rest, as a repeat customer I want to see a variety and I don’t want the same brands rolled out over and over again – Hopefully, the recent cash injection will help to address this.

A couple of weeks back I asked Go Banana a few questions about their website – They’re currently pitching their ‘online building supplies’ business on Seedrs.

I asked them to explain why one of their listings (a can of paint) was much cheaper in Homebase and why the listing neglected key details like the size of the can. I did this purely as an example of one product, there were more that exhibited the same attributes – high price, missing details.

I also pointed out my reservations with the model, pointing out that builders often use a variety of local merchants where delivery is often quick and free. In my experience builders also tend to know where things are cheapest and/or offer the best quality in the local area, so if a site like this doesn’t immediately show them known products at a cheaper price why would they bother?

The response I got was interesting. Immediately Rami Naori jumped on my single example and said “To take one of 105k products and say we are expensive was not real research” – No comment on why details were missing and the instant assumption that I had looked at just one. Apparently, the fact that buyers and sellers are brought together by Go Banana and if buyers are not happy with prices it may lead to sellers to reduce their prices – I’m sure builders are going to have plenty of free time to moan about prices on the site, even if they are allowed to do so. Further to this, he mentioned that a one stop shop will add convenience, citing the fact that they had 3,500 boilers listed. I’m not sure plumbers want to pick from 3,500 boilers.

He topped off the email with a complaint about my anonymity and the fact that my blog was nothing but negative – poor research on his part, there are at least two positive stories on this blog.

The reason I mention all this is because the campaign looks to be struggling with just over £89k raised of a £250k target and 43 days to go. I can’t say I am particularly surprised, the discussion board raises points similar to the above and the responses from Rami are somewhat defensive, dismissive or just plain secretive, he has no interest in releasing any meaningful information unless potential investors are prepared to sign an NDA!

We had an update from Den today, I’ve talked about them several times before – For the uninitiated, at some point in the future, they are going to start making smart light switches and plug sockets.

Today we were told they’d now hit the market in January 2018 having previously been told they’d be launching in September 2017 (and before that January – June 2017). They’ve now had a significant amount of money from Seedrs investors (by my reckoning over £5m) and very little to show for it.

We’re now getting to the point where the rest of the market is starting to overtake Den, regardless of whether their product has more advanced [patented] inner workings, you can’t argue the fact that it is getting ever simpler to setup something like Amazon’s Alexa to control things in your home if you feel so inclined.

I now wonder if the company has got caught striving for perfection (this would explain the increased resale prices I’ve talked about before), it’s all too easy for a product designer to get carried away making the product as good as it possibly can be without thinking about the impact that has on the price and time-to-market as the recent stories about Juicero will attest.

Houseology haven’t given us Seedrs investors since October 2016 despite several calls from investors to do so. This comes despite daily tweets and some relatively recent TrustPilot reviews.

Accounts filed in March (2017) for y/e 30th June 2016 show losses for the year at £2.1m so they’re now running a P&L account in excess of -£5.6m, add to this the fact that they had over £900k due to creditors in the coming year, a cash balance of £140k, stocks of £155k and debtors of £257k and things don’t look too rosy. I can see one of a few things on the horizon; another raise (given their lack of updates, I can’t see this going well on Seedrs, if they do raise I predict CrowdCube), they wind up when they run out of money in the not too distant future or they go into zombie mode eeking out the money as long as they can in order to survive.

I’m also not sure what the ‘investments’ on the micro accounts are for – the three companies cited all show overdue accounts (OHSO Interiors Limited, OHSO Homes Limited & OHSO Design Limited) all of which have the same sole director, one Kathleen Mooney. Digging into the CH documents some more and the story gets more confusing – I’m not sure what’s going on with the confirmation statements (some appear to be blank) or the directors, I’m not even going to speculate how they tie together.

I tried emailing a couple of weeks ago and got zero response, I’ll try a Tweet and see if that prompts them into action.

Someone made the excellent point today that Bird Cycleworks is currently valued at £0 by Seedrs if their ‘fair-value’ model is to be believed. Yep, that’s the same Bird Cycleworks who posted their company accounts a week or two ago highlighting a modest profit.

“We calculate fair value by looking at two share prices: the share price at which the investor invested; and the most up-to-date fair value of the shares (which we calculate when we obtain relevant information about the company in question).”

Bird Cycleworks fail to receive any value because they didn’t do their initial raise in the last three years, they haven’t had subsequent raises in the last three years. They have presumably produced a zero valuation because they “have conducted a substantive valuation analysis with a presumption of decline in value” . I’m not sure what this substantive analysis is based on or when it was performed – I presume it was around September 2016 when Seedrs produced their extensive valuation report and started publishing these valuations alongside the IRR.

This issue highlights a few more important points about the Seedrs valuation model.

How is ‘relevant’ information being used to determine a valuation when a company doesn’t meet the 3-year criteria? With the 3-year rules, at least the valuation method is transparent, regardless of whether it is accurate.

Are Seedrs actively seeking information from companies who’ve raised money on the site, particularly from those who fall outside the 3-year rules?

If Seedrs are using CH filings to determine valuations, this raises yet more points. How can accounts that are up to 9 months out of date when published possibly indicate the value of a company particularly when they are more than likely in the form of micro accounts that contain only a simple balance sheet?

If all companies who fall outside the 3-year rules received zero valuations I don’t think I’d mind so much, but there are other companies with positive valuations whose only raise(s) took place more than three years ago, here’re the first two I could find, there are many more:

Daredevil Project – Raised in Feb 2014, nothing on their Twitter feed since March 2016, nothing on Facebook since 2015, a website under ‘re-design’, recently filed accounts showing mounting losses. Shares currently available on the secondary market @ £0.61 per share.

Times Place Brasserie – Raised in Jan 2014, (still) unclear ownership, mounting losses. Shares currently available on secondary market @ £10 per share.

A couple of final points.

Does a successful trade on the secondary market constitute validation of the valuation and effectively override the 3-year rules?

Are the rules of valuation helping or hampering the ECF arena? At the moment you can sell a company you bought last week, but you can’t sell one that you bought more than three years ago if Seedrs’ opaque valuation model says it’s worthless… Go figure.

The Seedrs secondary market trading window is open again. As predicted, there are more listing this time with 292 lots listed (vs. 111 last month). Because there are more lots, I haven’t had the chance to do any real analysis yet – a quick skim through the various listings suggests there are companies on offer that weren’t available last month but I can’t say much more than this about what’s happening.

From a technical point of view, there look to have been a few tweaks to the way the listings are displayed with new sort order functionality (which doesn’t quite work correctly) and a drop-down but no changes with regard to the way the market actually functions – you can still only by lots in companies you already hold and you can ‘register interest’ (whatever that actually means) in the rest.

WeSwap has told investors it’s doing an incy-wincy funding round to get it over the summer. Initially we were told it was going to be open to existing investors only, now we’ve been told they’ve had interest from outside the existing investor base but we’re still getting first dibs and the valuation remains unchanged from the last round. If new investors do come on-board, let’s hope they restrain themselves and don’t bombard the message boards with inane comments about the design of their investor cards.

The round hasn’t opened yet, so there aren’t any more details at the moment – I’ll update when I hear more.